Budgeting & Types Of Budgeting.

Budgeting.

Budgeting is the traditional approach to exercise control. It is commonly used in practice. It used to monitor the performance of business and individuals. So that deviation from standards can be identified and corrective actions taken to achieve the business performance. It can used to motivate and reward employees by communicating the business expectations from them. There no fixed rule for budgeting. It is an internal affair, business can customize its budgeting approaches. Following are the types of budget used in practice.

 

• Fixed budgeting.

  Fixed budget is the original budget designed to forecast future performance and challenges faced by the business. So that resources can be arranged and competences can be developed to face these challenges. Fixed budgets can be used motivate employees. It also communicates the employees what level of performance is expected of them. It helps to harmonize the activities across the organization. Ex. Production manager will be informed in advance what quantity and quality of goods are required.

 

• Master budget.

  Master budget is also called cash budget. It is the head of all budgets. It is prepared at last after all other departmental budgets are finalized. In other words, Master budget is a fixed budget comprised all sub-fixed budgets. It help businesses to manage their cash flows. It enables businesses to arranged for cash flows. Ex. If business are about to acquire an item of machinery, cash can be managed by reducing some research & development expenditure.

 

• Incremental budgeting

Incremental budgeting as the name suggests budgeting based on previous year budget. Previous year budget is adjusted for inflation and activity level. It assumes that factors affecting the business will remain same as before. So it is suitable for stable business environments. It requires little time and resources as compared to other types of budgeting. It can be used by small businesses with lesser resources, simple business activities, fewer products and managed by owners. In practice is it widely used approach to budgeting particularly by not-for-profit organizations.

 

• Flexible budgeting

  Flexible budgeting is used for determining the possible impact on business objectives for range of circumstances, Ex. What will be the profit figure if business sells 10,000 units instead of 15,000 units. Flexible budget is used as feed forward control (Take action before thing go wrong) mechanism.

 

• Flexed budgeting.

  Flexed budget is used for performance measurement purpose. Variables like activity level (sales volume) are changed to facilitate comparison with actual or competitors results. It make the performance evaluation more meaningful in the way the performances between divisions or whole businesses are compared under same circumstances. Ex, if actual results are for activity level of 20,000 units then it will be meaningless if compare the original budget based on 30,000 units. By flexing it to 20,000 units, now it make sense to evaluate revenues, costs and efficiencies of the two divisions or business.

 

• Rolling budgeting.

  Rolling budget is not a one time activity, it is a process which continues throughout the life of the business. Initially first budget is prepared on quarterly or yearly basis. Afterwards, when each month passes, new month is added to the budget at it end. Also the existing remaining months are also reviewed for changing circumstances that might require the budget to be revised. In this way business have always quarterly or yearly budget present ahead. Rolling budget gives more realistic budgeted figures. It consumes plenty of managerial time and cost. This may be justified if benefit exceeds costs. It is suitable for rapidly changing environment.

 

• Zero-based budgeting.

Zero-based budgeting is the budgeting process starts from zero. It means all budget figure are gathered in the light of current circumstances. What was done before is ignored. This process repeats each year. It is very time consuming and costly approach to budgeting. It is suitable for business having activities of non-repetitive nature. Like construction business in which every projects are different.

 

• Activity based budgeting.

  Activity based budgeting is the approach based on data available for activity based costing. This approach is different from all above approaches in the way it is the budgeting based on activities, while traditional budgeting is based departmental jurisdictions. Department based budgets focuses on cost and revenues of their own area while business is performed by carrying out activities. So activities based budgeting gives information in the way business operates. Control are better exercised by focusing on activities, which activity to improve, increase, decrease and discontinue. It requires sound information gathering systems through the use of information technology. This is the most complex form of budgeting requires training, technology and time to implement it.